Email of the day (1)
Comment of the Day

August 17 2011

Commentary by David Fuller

Email of the day (1)

On gold since Bretton Woods (from Moscow):
"Hope you are doing well.

"Just to draw your attention to some interesting numbers. Monday marked the 40th anniversary of the end of the Bretton Woods system - Richard Nixon cancelled the dollar convertibility into gold and some other measures on August 15, 1971.

"I made some calculations. Before Nixon announcement, the price of gold was roughly $43.5. Last Thursday it reached $1813.79 (all numbers are by Thomson Reuters). That means that during 40 years of fiat currency system gold appreciated almost 42 times. Also, even at the bottom of the secular bear market, when the nominal price fell to $253 in 1999, it was higher than before the reform, if we factor inflation in. In 1999, $43.5 would be worth $179, the Minneapolis Fed inflation calculator shows. And this year, it is worth $239.4.

"Hope, you find it interesting."

David Fuller's view I am, thanks, and I appreciate the numbers which will be of considerable interest to many readers.

And some financial types still pretend that gold is not hard money, presumably including Mr Bernanke, who in response to Ron Paul's question replied that investors bought gold because of "tradition".

For the record, here is our chart of gold adjusted for CPI inflation over most of that period, commencing in 1975. It is inconceivable to me that gold will not exceed its 1980 peak on a CPI-adjusted basis in this cycle, given all the fiat currency printing that has occurred subsequently, plus all the additional global GDP growth which has occurred, not to mention all the additional people who are free to purchase gold should they wish to.

However, that additional advance is likely to take time because gold's upward march against paper money remains orderly and in a step sequence. While this will probably end in a parabolic move one day, just like so many other secular trends, that event is probably several years away, in my opinion.

Currently, gold is overextended in USD (weekly 5-yr & weekly 10-yr), relative to its medium-term trend approximated by the 200-day moving average, following its seventh consecutive week to the upside. Therefore, unless gold is now entering its climactic bubble phase, which is not impossible although I doubt it, it is due for more of a reaction and ranging mean reversion phase than we have seen very recently.

Following the recent acceleration we can see from the charts above that gold is more overextended in numerical terms relative to its MA than previously within this secular bull market to date. However, this is not the case in percentage terms as you can see from this 10-yr semi-log chart.

Nevertheless we know that trend acceleration is unsustainable beyond the short to occasionally medium term and therefore always leads to a peak of unspecified duration. Consequently, it would not be unreasonable for it to see a reaction of at least the approximately $120 seen on the three previous pullbacks. This reaction could occur either because the gold price weakens temporarily, or the USD strengthens, or both. (See also Eoin's excellent review on 11th August.)

Whether or not gold reacts temporarily in USD, which seems likely, this may not be the primary concern of subscribers who evaluate its performance in other currencies. Fortunately, we can see these in the Chart Library. Here are a few samples, shown on 10-year, semi-log line charts:

Gold in CHF has risen sharply recently, following the SNB's efforts to weaken its currency. Consequently bullion appears to be nearing completion of a lengthy consolidation against CHF and it would have to break down out of the current range to reverse this outlook.

Gold in EUR saw a major breakout in July. It is likely to see small, periodic consolidations of gains before the next medium-term correction but a break back beneath €1000 would now be required to question overall uptrend consistency.

Gold in GBP is beginning to appear somewhat overextended but a reaction in excess of the last two, commencing in January 2011 and June 2010, will be necessary to indicate that a medium-term correction is underway.

Gold in SGD would also require a bigger reaction than the last two, to indicate the onset of a medium-term pause.

Gold in CNY is similar to SGD above.

Gold in AUD saw an important low at the beginning of last month and would have to sustain a break beneath that level to indicate a deeper reaction during the consolidation of its earlier very strong gains since July 2003. (Note: to check the precise dates for moves on these charts, review them in the Library with the 'Tracking On' function shown in the charcoal bar above each graph.)

Gold in CAD is similar to SGD and CNY above but somewhat more overextended in the short term.

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